Can You Use a 1031 Exchange to Pay Off Property You Already Own?

1031 Exchange Rules

A 1031 exchange must be used to purchase replacement property that you do not already own. This is an "exchange" or swap into something new that is like kind to what was disposed of.

Making improvements to property that you already own, or paying off debt on real property that you already own is generally not viewed as an exchange by the IRS.

If you purchase personal property (chattel) such as furnishings, these would not be considered like-kind to the sale of real estate because real estate and personal property are not viewed as like-kind to one another in the eyes of the IRS.

3 Rules of Thumb

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain:

  1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}
  2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.
  3. And to the extent that you were relieved of liabilities and DEBT, such as mortgages on your old  relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks.

Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

  • 1031 Hotline: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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